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Scan Risks - Edited Image.Courtesy: WB report 'Riskier Future' May2016
Companies prefer rule book to Prime Minister Narendra Modi’s good book on demonetization. They are disclosing to potential investors the unfolding hazards of demonetization. The firms have thus overlooked the risk of being clubbed with demonetization critics as supporters of corruption and black money.
About a dozen companies have disclosed the anticipated adverse impact of demonetization on their operations in particular and economy in general. The companies that made such disclosures in their respective prospectus/offer documents for equity or debt include Government-controlled Housing and Urban Development Corporation (HUDCO), Mahindra & Mahindra Financial Services Limited (MMFSL) and National Stock Exchange (NSE)
Companies mention risks faced by them in compliance with Securities and Exchange Board of India’s (SEBI’s) Disclosure and Investor Protection Guidelines issued under SEBI Act. Post demonetization, such revelations are expected to become the new normal. The disclosures’ impact on issue price of equity remains to be seen.
Start with Central Depository Services (India) Limited (CDSL). It says: “GDP growth in the first half of Fiscal 2017 was 7.2%, compared with 7.5% in the same period of Fiscal 2016. Post demonetisation, it is expected to be 6.6% in the second half of Fiscal 2017. Private consumption, at about 55%, is the largest contributor to India's GDP. Short-term impact on private consumption is expected to be negative. Fresh investment plans may be put on hold if private consumption doesn’t pick up and uncertainty continues which, in turn, might further delay the much-needed recovery in India's private investment cycle.
In its draft red herring prospectus (DRHP) dated 28th December 2016, CDSL observes: “A decrease in cash liquidity may cause a short term reduction in the purchase and trade in securities by the public in India. The long term effects of these measures on the Indian economy, on the markets for securities, and our operations in particular are currently unclear and there can be no assurance that this will not have any impact on the Indian economy and investment in the Indian capital markets in general and on our business in particular.”
It adds: “Any slowdown in the Indian economy or reduction in investment in securities in India as a result of this may adversely affect our business, results of operations, financial condition and prospects.”
Similarly, NSE says: “There is a great deal of uncertainty on the near-medium term impact of demonetisation. The move has potential to become an inflection point for banking and capital markets sectors, as well as for the economy as a whole. We believe that it is too early to define likely scenarios or to estimate quantitative impact of demonetisation on turnover in various asset classes. As such, this report (finalised before the full impact of demonetisation is clear) does not take into account the opportunities for faster growth of capital markets nor does it factor in potential slowdown in the economy in the near term.”
In its DRHP dated 28th December 2016, NSE has also struck Government’s positivity chord. NSE thus foresees ‘less-cash’ economy in near term and ‘cashless’ economy in medium term. 
It adds: “we can expect that demonetisation may lead to attractive growth opportunities for exchanges in India.”
MMFSL says: “Demonetisation of currency notes may adversely affect liquidity of our customers and their ability to repay loans borrowed from us. Lending to customers in rural areas and semi-urban areas with limited access to bank branches and post offices may see some near-term and long-term difficulty in the collections of loans which could have an adverse effect on the business of our Company. Due to a decrease in repayment from customers, our liquidity and ability to lend will be adversely affected, which will have a material adverse impact on our business, financial condition and operations.”
In its Offering Circular dated 22nd December 2016 for raising debt from global investors, MMFSL adds: “Though MHCVs (Medium and heavy commercial vehicles) are largely purchased on finance, in the near term there would be some decline in sales due to the demonetisation of Rs 500 and Rs 1000 currency notes by the Government, as customers would find some difficulty in making the down payment. LCV (light commercial vehicles) sales will get hit more compared to MHCVs as the finance penetration is low in LCVs purchase.” 
PSP Projects Limited, in its DRHP dated 27th December 2016 says: “This new regulation (demonetization) could result in reduction of liquidity in the economy and may have an impact on various sectors which may include sectors such as Real Estate wherein we also operate. As a result, such changes or interpretations could have an adverse effect on our business and financial performance.”
Says HUDCO: “If the Demonetisation of Banknotes or any future demonetisation initiative of the GoI leads to a decrease in the volume of housing sales, it may result in a decline in demand for housing finance, which could have a material adverse effect on our business, results of operations and financial condition.”
In its DRHP dated 30th December 2016, HUDCO has banked heavily credit rating major ICRA’s opinion to apprise investors about risks ensuing from demonetization. 
Educational Content provider, S. Chand & Co., in its DRHP dated 16th December 2016, says: “Demonetization has created certain liquidity issues for cash transactions in India which is expected to continue in the short-term. Economists expect that these liquidity issues may cause Indian economic growth to slow in the near term; however, the actual economic impact on the Indian economy is uncertain. We are unable to quantify the impact of Demonetization on our business or the Indian economy and make no assurance whether or not such Demonetization could materially and adversely affect our business, results of operations and financial condition.”
Relstruct Buildcon Private Limited says: “The domestic consumption story was impacted by demonetization in the last two months of 2016. It led to a 25% hit being taken by retailers, especially in the tier-II, III cities, where the volume of cash transactions is higher. Business is expected to normalize from 2Q17, unless a new policy is announced. GST’s implementation, if well-planned, will prove to be very beneficial to the retail sector. However, if GST’s implementation is poor, it could result in chaos and affect consumption again. Retailers would get intensely involved in sorting out the issues that would ensue with a poorly-planned GST rollout, and thereby lose focus on their core business.”
In its DRHP dated 28th December 2016, Relstruct observes: “The demonetization move caused considerable turmoil; however, along with the Benami Transactions Act, it promises to bring greater transparency in the real estate sector.” It adds: “Affordable housing will come into sharper focus now than in previous years.”
Libas Designs Private Limited, in its DRHP dated 19th December 2016, says: “Changes in government regulations like demonetisation etc or their implementation could disrupt our operations and adversely affect our business and results of operations.”
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